Gold, Silver, Metal Prices Commentary – April 5, 2010

The positive jobs report issued last Friday reverberated into this morning’s market action in various assets. Although the 162,000 jobs added last month were the most in thirty-six months, the headline figure did miss economists’ expectations, the shortfall was due to fewer-than-forecast census-takers being hired by the US government. Thus, the conclusion that the US economy is, indeed, finally, on the path to recovery, was given a ‘valid’ label as the first quarter of 2010 ended.

Gold prices stabilized near the $1125 value zone in thin overnight dealings, and with the London market still closed today, more of the same can be expected today. More thin trading, more excess volatility, more exaggerated moves engendered by such conditions.

The new headline number to watch this morning will be the ISM non-manufacturing index one. As well, participants will not lose focus of the US pending home sales figures. More importantly, hardly anyone will miss being on the lookout for the Fed’s closed-door meeting today. The discount rate will come into discussion and an ample supply of Fedspeak will also be on tap this week.

New York spot metals dealings opened with muted and mixed results for gold and for silver, however the noble metals complex continued to move higher on the back of continued ETF attention being manifest again. Economic recovery spells robust auto sales in the speculators’ market book. Iron rolling off the lots spells higher offtake of platinum/palladium/rhodium in said books.

Spot gold traded ten cents higher on the open, quoted at $1126.50 the ounce, while silver slipped one penny to start at $17.90 per ounce. Platinum gained $13 per ounce, opening at $1681.00 while palladium added $1 to rise to the $490 level – a two-year high. Overbought conditions in the white metals give reason for caution. The dollar continues above the 81-mark on the index, while the euro has not recaptured the 1.35 level despite what appeared to be a near-term respite in the credit/budget/eurozone debacle.

However, gold’s own two-week peak achieved last week and the essentially dollar-bullish tilt that the jobs data should engender, might also make for difficult work when trying to overcome resistance found overhead near the $1135-$1140 area.

Elliot Wave analysis spells the numbers a bit more precisely, arguing that any rise above $1134.50 would imply that gold could move higher (as in, towards $1162 or more), whilst a failure near these levels could take the yellow metal towards the $950 zone first. As of the latest tally, open interest in gold shrank by roughly 15K contracts and our friends at RBC Capital Markets are tracking higher levels of attention being given to copper and platinum on the basis of the perceived US economic rebound.

Muted conditions prevailed in the physical markets over the weekend, with local prices slipping beneath world quoted values in Vietnam. Spreads have narrowed to as little as 20,000 dong per tael (37.5 grams) as dealers try to attract reluctant investors. Indian buyers remained largely on the sidelines, apparently preferring to wait for a resumption of full-bore trading around the world on Tuesday.

Bigger problems have emerged in Dubai (a gateway market to India) where gold sales plummeted by about 50% in QI of this year. A combination of sky-high gold prices, no funds available for luxury goods-spending, and an exodus of Asian workers from the emirate have put a serious dent in bullion offtake in the City of Gold. Signs also abound that consumer are apparently shifting towards diamonds in the wake of gold’s price spike, and that this is now a six-years-old trend rather than a recent phenomenon.

World Gold Council statistics indicate that more than 4,000 tonnes of gold bullion were imported by India in the half-decade stretching from 2004 to 2009. However, the findings by DNAIndia.com reveal that the appetite for gold in India is shrinking –wedding seasons notwithstanding and that a bad monsoon (such as was initially seen shaping up in the early part of last year) could further dampen such consumption right where it counts the most: in India’s rural heartland. It is common knowledge that provinces such as Kerala for example are the very epicenter of physical gold offtake and that they must be counted into any equation that tries to define the gold market globally. Then, there is also the issue of ‘second-hand’ gold or pledged gold to consider.

Says DNAIndia that:"If a farmer prefers to save money in physical gold, he also uses this as collateral to raise funds from banks, private financiers and pawn brokers. Where banks are absent, the borrowing farmer has no real option but to borrow from these private lenders and pawn brokers. The culture of pledging gold is fast spreading to the urban population as well, if the offers of public and private sector banks to lend money against gold jewellery are any indication.

This "second hand" market for gold (dynamics change year to year) is sizably bigger this year than the "first hand market" as high bullion prices have deterred buyers and encouraged borrowers to avail of loans to tide over a liquidity crunch, especially in the rural areas.

Should the price of gold decline below the Rs 16,000 [per ten grams] mark in the near term or even remain static over the medium term, there is an increasing risk of this "second hand" pledged gold being offered in the street. That will have a multiplier effect and exert a downward pressure on prices.

The 2010 monsoon will be a critical factor for not only the economic outlook for the country but also the prospects of this "second hand" market. Bullion traders can ignore this aspect entirely at their own peril."

In the interim, arguments (pro and con) about gold’s current state continue to pop up in various articles as the price run in gold enters its tenth year. Exuberance, or caution? More of the same, or a change in direction? There is plenty out there from which to take your pick.

A veritable Rorschach test waiting for you to fit your vision to the amorphous blob. One such piece from the LA Times, pits analysts at Resource Consulting Group against financial planners and money managers who do not see signs of a bubble –yet– emerging or being ‘mature’ in gold.

Watch the ISM, listen to the Fed. See oil at $86 for…what reason? Oh, yes, the jobs…thing. Here is one item that could take gold to those strength-test levels.

In addition to the bullion 2010 American Silver Eagle that is already available, the United States Mint this year will also issue the Grand Canyon America the Beautiful Silver Bullion Coin. Click on the link to learn about the coin and the new bullion series from the Mint.